The 20% QBI deduction

The regulation says:

"Q5. What is a qualified trade or business?
A5. A qualified trade or business is any trade or business, with two exceptions:

1. Specified service trade or business (SSTB), which includes a trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, investing and investment management, trading, dealing in certain assets or any trade or business where the principal asset is the reputation or skill of one or more of its employees. This exception only applies if a taxpayer’s taxable income exceeds $315,000 for a married couple filing a joint return, or $157,500 for all other taxpayers

2. Performing services as an employee"

S-corp owners are required by law to perform services as an employee for the S-corp. Would that disqualify them for the 20% QBI deduction?

Their wages do not qualify as QBI, but the pass through from the S-corp can.

i.e. Wages don't count for anyone.

"S-corp owners are required by law to perform services as an employee for the S-corp."

Huh?

"S-corp owners are required by law to perform services as an employee for the S-corp."

Huh?

I might not have phased it in the best way. I was referring to the reasonable wages requirement for the S-corp owners.

Their wages do not qualify as QBI, but the pass through from the S-corp can.

Is the pass through from the S-corp subject to the industry restriction? Let's say the S-crop is an accounting firm, does the S-corp owner get the 20% deduction if his income is under the limit?

The K-1 box 17 code V will have the QBI amount, box 1 continues to have ordinary income. The yet to be released pub 535 has worksheets for the S-corp to determine QBI. If the shareholder is under the limits then the shareholder is eligible for QBID even if the S-corp is an SSTB.

BQ, yes. The limits of the SSTB's don't apply when under the income limits.

Thank you.

One last question. Does the QBI of an S-corp includes the wages of the Scorp owners?

Let's say a Scorp owner received $10,000 as ordinary income on K-1 (Box 1) and he also received $80,000 as wages on W-2, would his QBI $10,000 or $90,000?

No.

I was gonna add: Unless we determined a portion of the $80K was in excess of reasonable compensation.

But, I think it best not to go there.

No.

I was gonna add: Unless we determined a portion of the $80K was in excess of reasonable compensation.

But, I think it best not to go there.

If that is the case, would a LLC be a much better option tax wise than a S-corp?

Let's say a Scorp owner convert his Scorp to a LLC, he would get the 20% QBI deduction based on the full amount of business profit as he does not need to pay himself on W-2. Is it right?

"...If that is the case, would a LLC be a much better option tax wise than a S-corp?"

It depends on the numbers. ALL of the LLC income would be subject to SE tax vs just the "reasonable compensation" in the S-Corp.

Plus, you can't just *convert* a Corp to an LLC. The assets come out at FMV, with potential for phantom gains.

You'll need to run the real numbers thru all the scenarios.

For the QBI, yes, the LLC benefits more, as does the sole prop. You've got SS issues to consider tho'.